The Lennox Generating Station is a 2120 MW dual fuelled oil and natural gas plant located near Bath, Ontario, owned and operated by Ontario Power Generation. Originally only oil-fired, Lennox GS was commissioned in 1976, laid up in 1982 and reopened in 1987. Two units were again placed in reserve between 1994 and 1998. The station was converted to dual oil/natural gas fuelling in 1998-2000.

One of the approvals sought by the Ontario Power Authority in its proposed Integrated Power System Plan for Ontario was for a contract with Lennox GS to replace the succession of annual Reliability-Must-Run (or “RMR”) contracts that have been in place between OPG and the Independent Electricity System Operator since 2005.

In its previous decision approving last year's RMR contract, the Ontario Energy Board indicated an interest in moving from annual contracts to a two-year contract. In the first Procedural Order for the case, the OEB referenced the IPSP's forecast that Lennox would be required until 2020.

AMPCO intervened in the case seeking to mitigate the high costs that Lennox is imposing on consumers. We sought to document these costs and to seek updated information on demand and supply so that the Board could base its judgements the reality of decreasing demand and the growing fleet of new, much more efficient gas-fired generators coming into service.

What follows is a transcript of AMPCO closing argument and the decision.

 Submissions by Mr. Adams (Appearing for AMPCO):

MR. ADAMS:  Thank you, Madam Chair.  The proposal before the Board would continue the status quo with respect to Lennox.  Surveying this status quo, what do we find?

Lennox is an extremely costly, old facility.  In recent years, the cost of its product has dropped as low as 19 cents a kilowatt-hour, but has been as high as 27 cents a kilowatt-hour.

In the order of 162 people work at the station, although we know that in recent years the capacity factor has not risen above 4 percent.

None of the tests of reasonableness of the costs that Mr. Cass has urged you to rely on consider alternative means of meeting the needs currently met by Lennox.

AMPCO's submission is that there is no evidence before the Board that would justify anything more than continuation of the one-year RMR contract as proposed.  We agree with Mr. Cass in that respect.

The IESO has directly testified that based on current information, an RMR would not be required after September 2009.  With load declining and new facilities coming into service, the long-term need for Lennox is unpredictable.

The OPA's witness anticipated a need for the station until 2014, but I am not suggesting that the Board hold him strictly to that forecast.

While I suggest that there is no case for anything but a one-year renewal based on the evidence before you, AMPCO urges the Board to provide some wider guidance to the various proponents that control the disposition of Lennox.

There appears to be no material savings available for the customer account arising from a potential two-year contract.  Instead, the Board should direct the proponents to sharpen their pencils and mitigate the cost burden that Lennox represents.

The evidence in this case has revealed a general failure of creativity and initiative to mitigate the inefficiency of Lennox as a source of supply insurance.

One indication of this lack of creativity and initiative is the discovery by OPG in 2007 that it could enhance the efficiency of this station by replacing its auxiliary boiler with co-generation; this, after decades of running the simple cycle auxiliary system.

The explanation that OPG has offered for why it has just discovered this CHP option, that explanation being that the plant might be decontrolled and the investment might not all be recouped, is only a partly satisfying story.

There have been opportunities to fix this problem before.  For example, the OPA has run procurement processes for co-generation in the recent past which were, in fact, undersubscribed.

The truth is that cost-plus contracting is a sleeping pill for monopolists.  When the plant can flow all of its costs through to consumers, why would the company bother asking those 162 workers to break away from their routines to try to upgrade the place?

From a consumer perspective, there appear to be a number of alternative approaches that might be pursued, possibly CHP, although it is an option that has a high upfront cost and a relatively modest fuel saving over time.

Another option is potentially to find an alternative supplier, possibly Quebec, possibly others.  Another option is to keep Lennox on a short leash until it might be mothballed in case it has to be brought back into service.

There is no need for the Board to express any opinion on any of these.  I am only raising them as an illustration that there are constructive responses available.

This case has revealed some wider concerns about how peaking power is priced in the market.  My client is very concerned about the scale, scope and outlook for the global adjustment that they pay on their power bills.

My client is also concerned to ensure that no cost-effective conservation opportunities are foregone.

The contracting methodology underpinning the RMR is consistent with the market rules and OPG's licence.  We don't take any issue with it in that sense, but we are concerned that it does send an inaccurate signal to the market of the cost consequences of consuming power on peak.

In fact, as we have seen, market revenues have not recovered even the full fuel costs of Lennox for several years.

The outlook for RMR number 4, as set out in undertaking J1.1, indicates recovery of only about 73 percent of -- I'm sorry, a recovery of less than 25 percent of Lennox's anticipated fuel costs under the current outlook.

Of course we know these outlooks are subject, because it is a peaking plant, to a lot of volatility, but it is an indication of the kind of problem that I am speaking to.

AMPCO would invite the Board to comment in its decision that the OPA should review the options for mitigating costly peaking power requirements on the system based on what we have observed in this case.

Thank you.  Those are my submissions.

DECISION OF THE BOARD:

The Board has considered the evidence filed in this proceeding and presented during the hearing today.

There is no disagreement amongst the parties that Lennox remains needed for reliability reasons.  The parties will be aware, from the last decision regarding Lennox and from Procedural Order No. 1 issued in this proceeding, that the Board was concerned about being routinely asked to approve one-year RMR arrangements for Lennox.  Particularly given that the RMR contract costs are high, the Board wanted to examine potential savings of multi-year contracts.

However, the Board is satisfied that the evidence in this proceeding demonstrates that, based on current assumptions and expectations, Lennox will no longer be required for reliability reasons beyond September 30th, 2009.

The Board understands that alternative contractual support for Lennox beyond that date is anticipated.  That support would likely be obtained through the OPA and justified for reasons of system adequacy, rather than local area reliability.

The Board assumes that the OPA will be diligent in its consideration of the costs of contracting for supply from Lennox in the future.

The Board accepts that the financial provisions of the RMR agreement are structurally the same as those in RMR agreements that have previously been approved by the Board.  In addition, the Board recognizes that the IESO audit reports have also determined that the contract costs are reasonable.

The Board, therefore, finds the financial provisions to be reasonable.

The Board, therefore, approves the RMR agreement for the period October, 1st 2008 to September 30th, 2009 in the form filed by OPG in its application.

...

If there are no further matters, I wish you all a happy holiday and will likely see some of you in the New Year.  We are now adjourned.